
§ Limits to the Tax Benefit of Debt
§ In the first place, a firm receives a tax benefit only if it is
paying taxes in the first place (taxable earnings)
§ Think about a firm with EBIT of $1000 and tax rate of 35%
§ With no leverage, the firm pays $350 in taxes
§ With high leverage and interest payment of $1000, the firm
pays no taxes
§ With excess leverage, there is no increase in tax savings